Overtime Pain and Gain

With changes to federal overtime-pay rules moving toward implementation this spring, human resources executives may be burning the midnight oil to ensure compliance. The gnarly question: Who will get overtime and who is exempt?

As always, staff will be there to work through the nitty-gritty of payroll revisions and job-description tweaks to comply with the proposed changes to the overtime-pay provisions of the Fair Labor Standards Act. But before those details are worked out, human resources managers will have to deal with two issues. One is whether the company should strive to wring all potential payroll savings out of the new rules. Another is the emphasis that a company should place on keeping employees happy about their compensation in this tightening labor market, regardless of what the law allows.

It’s been a hard fight, but the Bush administration will get the overtime-pay rules it has sought since the Department of Labor first published the proposed changes in March 2003. The Republican-controlled Congress has beaten back a 10-month effort by labor advocates to revise the proposal with a guarantee of overtime pay for more workers. Although the new rules will force many businesses with low-paid workers to swallow higher payrolls, Secretary of Labor Elaine Chao says that employers generally will be content to pay an additional $890 million in overtime. That’s because the proposed rules will save them $2 billion per year in legal fees that would otherwise have been spent to defend against employee suits alleging FLSA overtime-pay violations, she says.

Now Bush’s DOL is making last-minute changes to the rules in light of congressional testimony and the more than 80,000 written comments that have been submitted by employers, labor advocates and workers. The department had planned to publish the final revision on or about March 31. Rules changes usually become effective 60 to 90 days after publication. That isn’t much time for employers to face a daunting array of tasks to ensure legal compliance, consider substantial changes to their compensation structures and prevent a trickle or a torrent of departing disgruntled employees.

Some employers aren’t waiting for the final rule to revamp their overtime-pay and related compensation policies. One chain of 18 retail stores in New York and New England has already given its exempt managers a raise based on the proposed rules. Daddy’s Junky Music Stores Inc., a music-gear merchant headquartered in Manchester, New Hampshire, increased the base pay of store managers from $350 per week to $425, the proposed new floor for exempt employees, says Patti Bockus, human resources manager. This 21 percent raise translates into a $3,900-per-employee annual increase in payroll costs. The retailer’s exempt managers also earn sales commissions.

Everyone from labor advocates to CFOs agrees that the rules, originally enacted in 1938, are sorely in need of updating. The regulations refer to occupations such as "straw boss" and set the minimum pay for an exempt white-collar worker at less than what is now the minimum wage. But beyond that, opinions of the fairness and even the meaning of the new rules diverge rapidly. The essence of the regulatory change is to keep FLSA’s major categories of employees--administrative, executive and professional--while overhauling both the pay brackets and the duties tests that determine who is nonexempt and therefore guaranteed pay for overtime hours. Under the current rules, administrative and executive employees must earn less than $155 per week to have a right to overtime pay. Under the proposed rules, that pay floor would more than double, to $425 per week, or $22,100 per year. This change will give an additional 1.3 million workers the benefit of overtime pay, according to the DOL.

"There will be some pain incurred from that higher salary level," says Katherine Lugar, vice president for legislative and political affairs at the National Retail Federation in Washington, D.C. Especially in the South, many exempt retail store managers are paid less than the proposed salary floor of $22,100. The proposal requires employers to either change their status to nonexempt and pay overtime or raise their pay to the floor for exempt employees.

The controversy about the proposed rules focuses on a new duties tests for the vast middle of American earners, those who make between $22,100 and $65,000. In this category, some workers will lose the right to overtime pay, and their employers will face a difficult decision.

Some observers say that the bulk of employers will fill the gap. But Amanda Farahany, a partner with Barrett & Farahany in Atlanta who represents workers, is skeptical. "I’ll believe it when employees see it in their paychecks." Endemic pressure to cut expenses will inevitably cause many employers to use the opportunity to reduce payroll costs. "There will be more people added to professional ranks" and thus exempted, says Robert Brame, a management attorney and partner with McGuire Woods in Washington, D.C., and a former member of the National Labor Relations Board. Nothing in the proposed rules bars employers from increasing the workload and thus the hours of employees who are legitimately moved from nonexempt to exempt status.

The proposed rules would also affect employees with wages of more than $65,000 who have been entitled to overtime pay under the current rules. Nearly all of these workers would lose their guarantee of extra pay. Perhaps the biggest unanswered question is how many workers earning above $22,100 could lose the right to overtime pay. The DOL asserts that employers can rightfully transfer 644,000 workers from nonexempt to exempt status under the new rules. But worker advocates cite an analysis by the Economic Policy Institute that claims that up to 8 million employees could become exempt.

This gaping disparity casts doubt on a key notion put forth by advocates of the proposed changes. It is that the new rules will clarify the classification system and stem the tide of FLSA-based lawsuits. "If you wanted more clarity in the administrative exemption, you wouldn’t come up with a duty test as meaningless as ‘requiring a high level of skill or training,’ " says Ross Eisenbrey, vice president and policy director of EPI, a think tank in Washington, D.C.

In a labor market where power has just begun to swing back toward workers, employers must walk a tightrope strung between a heap of potential payroll increases for low-wage workers and a quagmire of employee turnover among better-paid ranks. "The cost of turnover is higher than the potential savings of taking away overtime pay," says Ronald Bird, chief economist at the Employment Policy Foundation, a think tank in Washington, D.C. Unlike most observers, analysts at EPF maintain that no worker who now has the right to overtime pay would lose the right under the proposed rule.

Given the complexities of overtime regulations, experts say that human resources will play an important role in shaping and conveying the message to all employees.